Feature Article - Components of Western Australia's economic growthThis article was published in the March Quarter 2005 issue of Western Australian Statistical Indicators(Cat. No. 1367.5)

INTRODUCTION

Economic growth has been described as the increasing ability of an economy to satisfy the wants and needs of its people over time (Parry and Kemp 2002). As production and incomes in the economy rise, so too does the standard of living. The interaction of a number of factors contributes to economic growth, including rising population, increasing inputs such as labour and capital, labour productivity growth and technological progress.

There are many ways to measure economic growth. The simplest way is to compare gross domestic product (GDP) or gross state product (GSP) from year to year. Using this measure, Western Australia has experienced more than a decade of strong economic growth since the early 1990s, with the average annual rate of growth in GSP exceeding 4.0% since 1989-90. However, a more useful way to measure economic growth is to compare real GDP or GSP per capita from year to year. This measure relates the real output of the economy to the number of people who produce and consume that output.

This article explores the drivers of Western Australia's economic growth (measured by real GSP per capita) over the decade from 1993-94 to 2003-04, and compares the state's economic growth with that of Australia. The analysis will be of a similar style to that used in the Intergenerational Report 2002-03, and will focus on five components of economic growth derived from the following equation:

Real GDP (GSP)/Population (real GDP (GSP) per capita)

= Real GDP (GSP)/Hours worked (labour productivity)

x Hours worked/Employed persons (average hours worked)

x Employed persons/Labour force (employment rate)

x Labour force/Population aged 15 years and over (participation rate)

x Population aged 15 years and over/Total population (proportion of the population aged 15 years and over)

DEFINITION OF TERMS USED IN THIS ARTICLE

Gross domestic product is the total market value of goods and services produced in Australia within a given period, after deducting the cost of goods and services used up in the process of production, but before deducting allowances for the consumption of fixed capital. Gross state product is defined equivalently to gross domestic product, but refers to production within a state or territory rather than to the nation as a whole.

Real GDP (GSP) is GDP (GSP) at market prices, adjusted for price changes. The Australian Bureau of Statistics (ABS) measures real GDP (GSP) using chain volume estimates. Chain volume estimates of GSP are derived by revaluing current price, income-based estimates of GSP, using deflators which are calculated from the expenditure components of the state series concerned.

ECONOMIC GROWTH

Between 1993-94 and 2003-04, the Western Australian economy experienced stronger growth than the Australian economy, with the state's real GSP increasing by 53.2%, compared to an increase of 46.2% in Australia's real GDP. In annual average terms, Western Australia's real GSP grew at a rate of 4.4% per year - faster than the national growth in real GDP of 3.9% per year over the period.

Growth in Western Australia's population also outstripped growth in Australia's population from 1993-94 to 2003-04 - rising by 16.4%, compared to an increase of 12.6% nationally. Both the number of males and females in the state increased at a faster rate than that recorded nationally over the period - males up by 15.9% compared to 12.4% nationally, and females up by 16.9% compared to 12.8% nationally. The average annual rate of growth in Western Australia's population over the period was 1.5%, compared to a national rate of growth of 1.2%.

Western Australia's real GSP per capita was on average $4,545 higher than Australia's real GDP per capita for each of the ten years from 1993-94 to 2003-04. The state's real GSP per capita rose by 31.5% ($10,855), compared to growth of 29.8% ($9,027) in Australia's real GDP per capita over the decade. Growth in Western Australia's real GSP per capita averaged 2.8% per year between 1993-94 and 2003-04, higher than Australia's average annual growth rate of 2.6% in real GDP per capita. The state's real GSP per capita in 2003-04 ($45,277) was a record $5,953 higher than Australia's real GDP per capita of $39,324.

LABOUR PRODUCTIVITY

Labour productivity is the relationship between hours worked and output. Increases in labour productivity can reflect improvements in education and training, increased competition, improvements in production methods within firms and the shift of labour and capital towards firms or industries that are more efficient. Productivity growth is a key driver of real economic growth in the long term.

Labour productivity (measured by real GDP (GSP) per hour worked) made a positive contribution to economic growth for both Western Australia and Australia, with the state recording higher growth in labour productivity than that recorded nationally between 1993-94 and 2003-04. The amount of real GSP per hour worked for Western Australia increased by 26.5% ($47.62 per hour), compared to an increase of 23.1% ($38.44 per hour) in real GDP per hour worked for Australia. Over the ten year period, growth in Western Australia's labour productivity averaged 2.4% ($4.76 per hour) per year, compared to 2.1% ($3.84 per hour) for Australia. Although the rate of growth in the state's labour productivity was below the rate of growth in national labour productivity during several periods over the decade, the amount of real GSP per hour worked was higher than the amount of real GDP per hour worked for each of the ten years, by an average of 8.6% ($15.70 per hour).

Because labour productivity is a difficult concept to measure and analyse, the reasons behind improvements in the amount of real GDP (GSP) per hour worked are not readily identifiable. Possible causes of higher labour productivity growth in Western Australia are a combination of strong multifactor productivity and capital deepening, as well as high levels of business research and development (Government of Western Australia 2004).

AVERAGE HOURS WORKED

Increases in average hours worked can lead to increases in total production, which in turn can contribute to economic growth. Growth or decline in average hours worked is largely influenced by the number of part-time workers.

Between 1993-94 and 2003-04, average weekly hours worked declined for both Western Australia and Australia, contributing negatively to economic growth. Average weekly hours worked decreased by 3.1% (1.1 hours) in the state, and 3.3% (1.1 hours) nationally. Over the period, the annual average rate of decline in average weekly hours worked was the same for Western Australia and Australia - falling by 0.3% per year. From 1993-94 to 2003-04, similar rates of decline were recorded by the state and the nation for average weekly hours worked by full-time employees - down by 0.6% and 0.7% respectively. Average weekly hours worked by part-time employees rose by 5.6% for Western Australia, and by 5.5% for Australia.

The decline in average weekly hours worked experienced by Western Australia and Australia over the ten years from 1993-94 to 2003-04, was mainly driven by large increases in the number of part-time workers. The number of part-time workers rose by 46.1% for the state and by 46.9% nationally; compared to increases of 17.9% and 15.4% respectively in the number of full-time workers.

EMPLOYMENT RATE

An increase in the employment rate (the proportion of employed persons in the labour force), or conversely a decrease in the unemployment rate, can contribute to economic growth by increasing total production, income and expenditure. A rise in the employment rate generally reflects buoyant labour market conditions.

Employment rates increased for both Western Australia and Australia between 1993-94 and 2003-04, making a positive contribution to economic growth. The proportion of employed persons in Western Australia's labour force increased by 2.9 percentage points, from 91.4% in 1993-94 to 94.3% in 2003-04; while the proportion of employed persons in the Australian labour force increased by 4.4 percentage points, from 89.8% in 1993-94 to 94.2% in 2003-04. Over the period, growth in Western Australia's employment rate averaged 0.3 percentage points per year, slightly lower than the average annual growth rate of 0.4 percentage points for Australia.

Despite experiencing slightly slower growth in the employment rate between 1993-94 and 2003-04, the proportion of employed persons in Western Australia's labour force has been equal to or greater than the proportion of employed persons in the Australian labour force for every year of the ten year period. However, the gap has narrowed from 1.6 percentage points in 1993-94 to just 0.1 percentage points in 2003-04. Stronger growth in Australia's employment rate has been driven by stronger growth in employment rates for both males and females - up by 5.1 and 3.6 percentage points respectively, compared to increases of 3.2 and 2.4 percentage points respectively for the state.

PARTICIPATION RATE

The participation rate is the labour force expressed as a percentage of the civilian population aged 15 years and over. It represents the proportion of the population who are either in a job or actively seeking work. An increase in the participation rate reflects a greater proportion of the working age population available to work, which can contribute to economic growth by increasing the effective labour supply.

Between 1993-94 and 2003-04, there was little change in participation rates for both Western Australia and Australia. The largest increase in participation occurred between 1993-94 and 1994-95, when participation rates increased by 1.1 percentage points for the state and 0.6 percentage points nationally. Between 2002-03 and 2003-04, participation rates fell for both Western Australia and Australia, down by 0.4 and 0.2 percentage points respectively.

Despite the recent decline, there was an overall increase in participation rates for both the state and the nation over the ten years from 1993-94 to 2003-04, contributing positively to economic growth. The state's participation rate rose from 65.5% in 1993-94 to 65.8% in 2003-04, while the national rate increased from 62.7% to 63.5%. The average annual rate of growth in Western Australia's participation rate over the period was 0.03%, well below the average annual increase of 0.07% for Australia.

Although Western Australia experienced slower growth in its participation rate than Australia over the period from 1993-94 to 2003-04, the state recorded a higher proportion of its working age population either in a job or actively seeking work for each of the ten years, by an average of 2.9 percentage points. Participation rates for both males and females were higher for Western Australia than for Australia - by an average of 3.2 and 2.3 percentage points per year. Higher participation rates in Western Australia partly reflect higher participation rates for persons aged 55 to 64 years, particularly males aged 55 to 59 years (Government of Western Australia 2004).

Participation rates for males and females moved in opposite directions between 1993-94 and 2003-04. Participation rates for males fell for both Western Australia and Australia over the period - down by 2.4 and 2.0 percentage points respectively. Conversely, participation rates for females rose by 3.1 percentage points for the state and by 3.4 percentage points nationally. Greater female participation in the labour force has been cited as the major driving force behind the increase in aggregate participation rates over the past 25 years, and reflects the fact that women have become better educated, have fewer children and greater access to part-time jobs and childcare (Productivity Commission 2004).

PROPORTION OF THE POPULATION AGED 15 YEARS AND OVER

The proportion of the population aged 15 years and over represents the maximum potential size of the labour force. Increases in the ratio may indicate a greater proportion of the population available to work, and reflect the ageing of the population. A rise in the proportion of the population aged 15 years and over can contribute to economic growth by increasing the size of the labour force, which in turn can increase total production and lead to higher per capita incomes.

Over the ten years from 1993-94 to 2003-04, the proportion of the population aged 15 years and over increased for both Western Australia and Australia, making a positive contribution to economic growth. The proportion of the population aged 15 years and over in Western Australia increased from 76.5% in 1993-94 to 79.1% in 2003-04, while the proportion of the population aged 15 years and over in Australia increased from 77.6% to 79.5%. Over the ten year period, the proportion of the population aged 15 years and over in the state increased by an annual average of 0.3 percentage points, compared to an average of 0.2 percentage points nationally.

CONCLUSION

Western Australia has experienced more than a decade of strong economic growth since the early 1990s. Between 1993-94 and 2003-04, the state's real GSP per capita rose by 31.5%, from $34,422 in 1993-94 to $45,277 in 2003-04. Over the ten year period, growth in Western Australia's real GSP per capita averaged 2.8% per year, outpacing growth in national GDP per capita of 2.6% per year.

The average annual rate of economic growth (measured by real GDP (GSP) per capita) is approximately equal to the combination of the average annual increases in five components. Analysis of these five components between 1993-94 and 2003-04 reveals that improvements in labour productivity made the largest contribution to the increase in both Australia's real GDP per capita (contributing 2.1 percentage points to the 2.6% rise), and Western Australia's real GSP per capita (contributing 2.4 percentage points to the 2.8% rise). Other components contributing to the state's economic growth were increases in the employment rate and the proportion of the population aged 15 years and over (each contributing 0.3 percentage points). The slight increase in the participation rate had a negligible effect on economic growth (contributing 0.0 percentage points), while the only component not to contribute to Western Australia's economic growth over the decade was average hours worked (a loss of 0.3 percentagepoints).

While economic conditions are currently favourable, a number of issues have recently emerged that could impact on future growth in the state's economy. In particular, capacity constraints have emerged in several areas, including labour supply, production and transport infrastructure such as ports and rail. Businesses have reported difficulty finding suitably skilled staff, and growth in export volumes has been limited by constraints on extraction and production capacity. It is likely that continued economic growth in Western Australia will, therefore, require a focus on supply - increasing output and productivity to meet demand and more effectively matching labour supply to demand.

Over the coming decades, the ageing of Western Australia's population and a projected slowing in the rate of population growth are expected to affect the state's economic growth. Most components of economic growth analysed in this article will be affected by the projected decline in labour supply, particularly labour productivity, average hours worked and the participation rate, as more people shift into older age groups where part-time work is more common and participation rates are lower. Given the potential impacts of the ageing population and slower population growth on the state's labour supply, it is likely that labour productivity will continue to be a key contributor to economic growth in Western Australia.

Reserve Bank of Australia 2004, Economic and Financial Conditions December 2004, Address to the Australian Business Economists and the Economic Society of Australia (NSW Branch), 14 December 2004, Sydney.

1 Based on chain volume estimates of GDP (GSP). Users are cautioned that these estimates are derived indirectly by calculating a deflator from the expenditure components of the state series concerned. Therefore, in general, the sum of the state estimates may not equal the estimates for Australia. It is emphasised that, at times, there may be movements that cannot be fully explained in the chain volume estimates of GSP through the use of the proxy deflator.